Richard Kauffman has worked at the highest levels of finance—as a partner at Goldman Sachs, a vice chairman of Morgan Stanley, and the head of a private equity firm.
Now as chairman of energy and finance for New York—Governor Andrew Cuomo’s first Energy Czar—Kauffman is trying to take the tools of the private sector and apply them to utilities. In his current role, he manages the state’s entire energy portfolio.
At Fortune Brainstorm E, the annual energy and technology conference in Austin, Texas, Kauffman said that the utility sector had been hidden and protected from the most significant business trends that had happened during his career over the last 35 years due to the regulatory compact. The regulatory compact grants a utility a monopoly in a specific area while requiring the utility provide power to everyone within that designated footprint.
While essentially every other sector has become customer-led, he said that the regulatory environment unique to utilities means they are still part of a “production-led system.” “Every other business has been re-engineered so the customer is at the beginning ” and then companies work backwards, he said. Meanwhile, utilities tellingly still call their customers “ratepayers.”
Utilities also lack the capital efficiency of other sectors, he added. Thanks to investment banking and private equity, returns on capital have gone up dramatically, he said. Changes in business models, adoption of technology, and new financial incentives have driven that shift. He noted that the average capitalization of the utility sector in New York State is 54%. “You look at other capital intense industries,” he said, “high 80s.”
Click here for more coverage of Fortune’s Brainstorm E conference.